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Economic recovery robust, inflation still a worry: RBI

Press Trust of India  |  Mumbai 

RBI

The Reserve Bank of India (RBI) today said India's economic recovery is "robust" even as it expressed concern over the prevailing high inflation caused by supply-side bottlenecks, which, it warned, could hamper sustainable growth.

However, the near-normal monsoon this year will help in cooling down food inflation, RBI Deputy Governor Subir Gokarn said after releasing the apex bank's annual report for 2009-10 here.

Besides, the faltering recovery in the US and Europe and a "soft landing" of China's high growth are likely to ensure that commodity prices would not harden in the near future, which in turn will help ease inflation, he noted.

"We have raised our GDP projections to 8.5 per cent because of strong domestic drivers, and global trends will not affect our growth momentum significantly," he said.

Describing the 2010-11 growth outlook as "robust" but warning against inflation, the report said: "Going forward, as the monetary position is normalised, addressing structural constraints in several critical sectors is necessary to sustain growth and contain supply-side risks to inflation."

"Improving the overall macro-financial environment through fiscal consolidation, a low and stable inflation regime, strengthening of the financial stability framework and progress on structural reforms will help sustain growth and boost productivity," the report said.

In its policy announcement in July, the RBI had upped the general inflation target for FY11 to 6 per cent from 5.5 per cent. Though headline inflation declined to 9.97 per cent in July 2010 from a high 10.55 per cent in June, the central bank has warned that supply-side constraints are still a big worry.

To a question, Gokarn said inflation is ruling high in India as compared to the rest of Asia because "our economy is the only one after China that is growing fast, and besides, the bad monsoon last year adversely impacted (food) prices".

Terming 2009-10 as a "complicated year", as rapid recovery has led to an unexpected spike in prices of both commodities and food articles, the RBI report said its monetary stance since the recovery started has been aimed at balancing growth momentum in the face of containing runaway inflation even as the global recovery looked highly uncertain.

Since January policy announcement, RBI has appeared more hawkish about an expansionary monetary policy, which was kicked in in wake of the global financial meltdown that began with the fall of Lehman Brothers in September 2008.

Since January 2010, the RBI hiked its key policy rates four times to rein in inflationary pressures on the economy.

The current repo rate, or the rate at which it lends to banks, stands at 5.75 per cent and reverse repo, the rate at which it borrows from banks, at 4.50 per cent. The RBI has left unchanged the mandatory deposit that banks have to maintain with the central bank, or cash reserve ratio, at 6 per cent in its July 27 policy announcement.

First Published: Tue, August 24 2010. 20:14 IST
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